Navigating California's Insurance Crisis: Prop 103 and the Road Ahead
Published Date: 08/27/2024
Navigating California’s Insurance Crisis: Proposition 103 and the Road Ahead
California’s insurance market is at a breaking point. Premiums are rising, carriers are withdrawing, and homeowners are increasingly being forced onto the California FAIR Plan — the insurer of last resort that was never designed to be a first line of defense.
For many Californians, it feels like the system meant to protect them is collapsing. But how did we get here? And more importantly, what can be done to restore balance to the marketplace?
In a recent episode of Insurance Hour, insurance expert Karl Susman offered a deep dive into the roots of the state’s crisis — tracing it back to Proposition 103, the regulatory reform passed in 1988, and exploring how the Sustainable Insurance Strategy, introduced by Insurance Commissioner Ricardo Lara, could reshape the future of coverage in California.
The Birth of Proposition 103: Reform with Unintended Consequences
To understand California’s current crisis, it’s important to revisit the origins of Proposition 103.
When voters approved the measure in 1988, it was hailed as a victory for consumers. The state was in an uproar over high auto insurance rates, and the initiative promised sweeping reforms that would hold insurance companies accountable.
The law mandated an immediate 20% rate rollback, meaning insurers were required to reduce their rates to 1987 levels. It also gave the California Department of Insurance (CDI) the authority to approve or deny any future rate increases.
At the time, the goal was clear: rein in insurers’ pricing power and make premiums more affordable. But the measure also imposed strict limits on how insurers could calculate risk. Instead of allowing actuarial discretion, Proposition 103 required that rates be based primarily on:
- The driver’s safety record
- The number of miles driven annually
- The number of years licensed
These factors made sense for auto insurance in 1988 — but as Susman explained, “they also stripped insurers of the ability to use data and models that reflected true risk exposure.”
That regulatory rigidity, he argues, has echoed across all lines of insurance — including property — for more than 35 years.
From Auto Reform to Property Market Collapse
While Proposition 103 was originally aimed at auto insurance, its framework soon shaped the entire California insurance landscape.
As climate change accelerated, wildfires grew larger and more destructive. Floods, earthquakes, and atmospheric storms became more frequent. Yet insurers were still required to base rates on historical data, not forward-looking risk models.
“Imagine pricing a home policy in 2025 using loss data from 1990,” Susman noted. “That’s essentially what California law forces insurers to do.”
The result: premiums that don’t reflect modern risks — and insurers who can’t stay solvent under those conditions.
When catastrophic fires struck in 2017 and 2018, the financial toll was staggering.
- Over 9,000 fires burned more than 1.2 million acres and caused $18 billion in damages in 2017 alone.
- The following year, the Camp Fire added $16.5 billion in insured losses — wiping out years of industry profits.
For perspective, insurers nationwide typically pay out around 59 cents in claims for every dollar they collect in premiums. In California, that figure has climbed to $1.15 or higher — meaning insurers are paying more than they earn.
“You can’t pay out more than you take in and stay in business,” Susman said bluntly. “These companies are for-profit entities, not government programs.”
The Bureaucracy Bottleneck: 280 Days for a Rate Change
Even when insurers try to adjust, Proposition 103’s rate approval process creates massive delays.
Each rate change must be submitted to the CDI with detailed actuarial justifications — a process that can take nine months to over a year. During that time, insurers are left operating at a loss, unable to respond to inflation, reinsurance costs, or new risk data.
As Susman put it:
“Imagine trying to run a business when you have to wait 280 to 300 days before you can change your pricing. It makes staying competitive almost impossible.”
This slow approval cycle has contributed directly to the market pullback seen in recent years.
The Exodus: Fewer Carriers, Less Competition
In 1988, California had over 100 insurers actively writing property coverage. Today, that number has fallen to around 70, with major carriers severely restricting new policies.
- State Farm, California’s largest homeowners insurer, halted most new business and limited renewals.
- Allstate stopped writing new homeowners policies entirely for several months.
- Farmers reduced appetite for high-risk areas, leaving many residents uninsurable.
This contraction has devastating consequences for consumers. Fewer insurers mean less competition, higher premiums, and reduced innovation.
And for those who lose coverage entirely, there’s usually only one fallback option: the California FAIR Plan.
The California FAIR Plan: From Safety Net to Lifeline
The FAIR Plan (Fair Access to Insurance Requirements) was created in 1968 as a last resort — a basic fire insurance program for those who couldn’t obtain coverage elsewhere.
Originally intended for a small subset of high-risk homeowners, it now insures over 3% of all California properties, a number that’s climbing every year.
“It was never meant to be a primary option,” Susman emphasized. “Now, in some regions, it’s the only one.”
The FAIR Plan’s coverage is limited — typically only protecting against fire and lightning — leaving out critical perils like water damage, theft, or liability. To get full protection, homeowners must buy expensive “difference-in-conditions” policies on top of FAIR Plan coverage.
Even more concerning, FAIR Plan losses are ultimately backed by the same private insurers that have already retreated from the market.
“It’s like a circular firing squad,” Susman warned. “The same companies saying they can’t afford to write in California are the ones paying for FAIR Plan losses.”
Rising Reinsurance Costs: A Hidden Factor
Another piece of the puzzle is reinsurance — insurance for insurance companies.
Reinsurers help spread risk globally, ensuring that no single company bears the full burden of a catastrophic loss. But as climate disasters intensify, reinsurance itself has become far more expensive.
Here again, Proposition 103’s outdated framework poses a problem: carriers cannot fully pass along those rising reinsurance costs to their rate filings.
That means insurers must either absorb the losses or forgo reinsurance coverage — both untenable options in a state with billion-dollar fire seasons.
The Sustainable Insurance Strategy: A Path Forward
Recognizing the growing instability, California Insurance Commissioner Ricardo Lara introduced the Sustainable Insurance Strategy (SIS) — a plan to modernize regulations and bring insurers back into the market.
The SIS includes several pivotal reforms:
1. Requiring Insurers to Write in High-Risk Areas
Under the new plan, carriers must commit to writing at least 85% of their statewide market share in areas designated as wildfire-distressed. This ensures that coverage remains available across all regions — not just low-risk zones.
“It’s about restoring access,” Susman said. “If private insurers return to these areas, we can reduce dependence on the FAIR Plan.”
2. Approving Use of Forward-Looking Catastrophe Models
For the first time, insurers would be allowed to use predictive models that account for climate change, wildfire risk, and mitigation efforts.
This marks a critical shift from outdated historical data toward modern, science-based pricing.
“If carriers can price risk more accurately,” Susman explained, “they can stay in the market and remain solvent — which means consumers get more options.”
3. Incentivizing Risk Mitigation
Homeowners who take proactive steps — such as clearing defensible space, upgrading roofs, or installing fire-resistant materials — will qualify for premium discounts.
This creates a win-win: safer communities and lower insurance costs.
4. Reforming the FAIR Plan
The SIS proposes expanding FAIR Plan coverage for commercial properties and improving transparency in how it operates. However, the long-term goal remains transitioning policyholders back to the private market.
5. Overhauling the “Intervener” Process
One of Proposition 103’s quirks is the intervener program, which allows advocacy groups to challenge rate filings — often delaying approvals for months.
While intended to give consumers a voice, the system has been criticized for being dominated by a single organization that profits from filing challenges.
The Sustainable Insurance Strategy seeks to broaden participation and return the process to its original purpose: meaningful public input, not bureaucratic gridlock.
When Will Californians See Relief?
According to the CDI, the new guidelines are already being rolled out and will continue through the end of 2024. By early 2025, insurers should be able to start using these updated frameworks.
Susman estimates that consumers may begin seeing new market entrants and improved availability by Q1 of 2025.
But he also offered a dose of realism:
“We’re not going back to 2018 pricing. Things cost more. Inflation, construction, reinsurance — it all adds up. Premiums will still be higher, but at least you’ll have options again.”
What Homeowners Can Do Now
While regulatory reform unfolds, Susman urged homeowners to stay proactive:
- Shop early. Don’t wait until your renewal date to look for alternatives.
- Invest in mitigation. Clear vegetation, upgrade materials, and document improvements.
- Understand your coverage. FAIR Plan policies are not full homeowners insurance — supplement them as needed.
- Stay informed. Monitor CDI announcements and communicate with your broker regularly.
“The days of having five quotes in five minutes aren’t here yet,” Susman said, “but they’re coming back.”
The Bigger Picture: Data, Trust, and Competition
Ultimately, California’s insurance crisis is as much about trust as it is about pricing.
Homeowners want reliable coverage; insurers want fair rates; regulators want accountability. The Sustainable Insurance Strategy represents a chance to balance those needs — if implemented carefully.
As Susman summed up:
“California is the first to face this crisis, but we’ll also be the first to solve it. We’re too big, too important, and too innovative not to.”
If successful, the reforms could become a national model — demonstrating how a state can modernize insurance regulation without sacrificing consumer protection.
Because in the end, insurance isn’t just about risk. It’s about resilience — and California is determined to build both.
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